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Accounting for Purchase

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Fred Moss, owner of Moss Interiors, is negotiating for the purchase of Zweifel Galleries. The balance sheet of Zweifel is given in an abbreviated form below.

Zweifel Galleries
Balance Sheet
As of December 31, 2008

Assets:
Cash $100,000
Land 70,000
Building (net) 200,000
Equipment (net) 175,000
Copyright (net) 30,000
------------------------
TOTAL ASSETS $575,000

Liabilies and Stockholders Equity:
Accounts Payable $50,000
Long-Term notes payable 300,000
TOTAL LIABILITIES 350,000

Common stock $200,000
Retained Earnings 25,000 $225,000
------ --------
TOTAL LIABILITIES & SE $575,000

Moss and Zweifel agree that:
1. Land is undervalued by $30,000
2. Equipment is overvalued by $5,000

Zweifel agrees to sell the gallery to Moss for $350,000

INSTRUCTIONS:
Prepare the entry to record the purchase of Zweifel Galleries on Moss's books.

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Solution Summary

The solution explains the journal entries relating to purchase of a business

Solution Preview

First step is to calculate the fair value of net assets (total assets - liabilities)
The total assets are 575,000. It is given that land is under valued by $30,000 and so value should be higher and equipment is overvalued ...

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